Trusts and wills are often used in estate planning to plan out the dividing of assets following a death. Individuals can use revocable trusts and irrevocable trusts when planning an estate, but what is their purpose and when should you use a revocable vs an irrevocable trust?
If you are considering revocable or an irrevocable trust in your estate plan, it is essential to understand the difference between them.
What is a Trust in Estate Planning?
A trust is a legal arrangement where property or other assets are held by one party for the benefit of another and trusts are often used by experienced estate planning lawyers. Trusts provide asset protection and can help guarantee a certain amount of money for beneficiaries, which is helpful for a beneficiary who may be unreliable with money.
Trusts can set fixed intervals in which the funds are distributed or wait for minors to come of age before the funds are distributed.
A trust agreement is only valid with these three essential elements:
- It must have a settlor who is the trust creator or trust maker, transferring ownership of property or assets to a trustee.
- It must have a trustee who holds and manages the property or assets for the benefit of one or more beneficiaries.
- It must have one or more beneficiaries who receive benefits from the trust.
Adding a trust in your estate plan can protect against paying estate tax on given assets and unlike a will, your heirs will avoid court and the whole probate process.
Trustees are in charge of distributing the trust assets and investing them in any way they see fit, which is why they are often used to ensure descendants get their inheritance. The trustee can decide exactly how the assets are distributed and to whom they will go when the trust owner dies, but trustees must also follow the rules set out in the trust.
You can read about all of the different kinds of trusts, here.
Revocable vs Irrevocable Trusts: What is the Difference?
When choosing a trust in your estate plan, know that you can use a revocable and irrevocable trust for asset protection.
A revocable trust is separate from a revocable living trust, but they both describe the same thing. You can do whatever you want with it at any time by amending the terms. However, an irrevocable trust generally cannot be modified without getting court approval from the people acting as beneficiaries.
Here are the key differences between the two:
What is a Revocable Trust?
Revocable trusts are created to allow the grantor the ability to revoke the trust at any time. A revocable trust places the settlor’s assets into a trust for the duration of their lifetime and then distributes those assets to beneficiaries upon death. The settlor is able to change or cancel (revoke) the trust during his or her lifetime.
Revocable trusts do not cover all the assets of the settlor, it only covers what is specified in the trust. So, if someone is looking to pass on their entire estate, it may be necessary to have other legal documents in place.
What is an Irrevocable Trust?
An irrevocable trust generally cannot be revoked or altered by the grantor. An irrevocable trust is set in stone once the terms have been agreed upon. Except under rare circumstances, changes to an irrevocable trust are not allowed.
Similarly, an irrevocable trust and irrevocable living trust can provide financial security for any children. They can also save you a lot of money on taxes. By removing assets from your taxable estate, those assets are exempt from certain tax measures upon death. It also allows you to avoid any tax liabilities from any future income arising from the assets.
Estate planning attorneys will encourage professionals with liabilities, such as doctors and attorneys, to use an irrevocable trust to protect assets. Assets transferred to an irrevocable trust are legally protected from liability.
How Do Revocable and Irrevocable Trusts Affect My Estate Planning?
Revocable and irrevocable trusts impact your estate planning because these legal documents tell lawyers what to do with your assets once you die.
Are Most Trusts Revocable or Irrevocable?
Most trusts chosen are revocable because it is tough to remove or modify an irrevocable trust. Although, they can usually be changed in exceptional circumstances and by paying a fee.
What are the Advantages and Disadvantages of a Revocable Trust?
A revocable living is more affordable and can be changed if they need to be. However, a revocable trust might not fully protect you from creditors. This allows for flexibility when you review your estate plan and make changes.
A revocable living trust gives you the power to name successors to your trust, such as a caregiver or children. When they take over after you’ve passed, they can distribute assets to the people in your life.
Should I Put My House In A Revocable Or Irrevocable Trust?
To avoid probate, you should put your house and other real estate in a trust. Most people utilize a lady bird deed in Texas, at a minimum. However, the most astute people choose to put their house in a revocable trust because it allows for more control over the trust asset.
In a revocable trust, you can still remove the house from the trust or change the terms. Taxes and finances are generally easier to manage with a revocable trust. Revocable trusts also have their place when solving the estate planning needs of blended families.
To minimize estate tax owed or to qualify for Medicaid, you should put your house in an irrevocable trust. Your house also remains protected from creditors and potentially the Medicaid Estate Recovery Program in an irrevocable trust. This approach is a leading vehicle for Medicaid asset protection in Texas.
What Should You Not Put In A Revocable Trust?
Some assets should not go into a revocable trust or revocable living trust. These include:
- Life insurance
- Retirement accounts
- Health Savings Accounts (HSA) and Medical Savings Accounts (MSA)
- Transfers or gifts to minor children
Revocable vs. Irrevocable Trust: Which Is Better?
Determining which type of trust is better for you depends on your specific circumstances. But an estate planning attorney at Thomas Walters, PLLC can help you.
In general, a revocable trust is easier because it can still be changed and it still helps to avoid probate court. The owner can remove people and put new ones in their place and modify how they want the assets handled within the trust.
If you are worried about your assets being seized by creditors or being used to satisfy a judgment against you, consider an irrevocable trust. Unfortunately, irrevocable trusts make the ownership title transfer to the trust beneficiary or trustee permanent.
Look to Thomas Walters, PLLC with Your Trusts
Choosing the right kind of estate planning and trust for your needs is essential. This will help you make more informed decisions about your future, avoid unnecessary complications, and ensure your assets and estate are handled in accordance with your wishes.
Whether you are thinking about a revocable trust or an irrevocable trust, consult with the Texas estate planners experienced in wills, trusts, and estate planning to determine the best option for you and your situation.
As the premier estate planning firm in Ft. Worth, Texas, we have helped many clients create their personal customized estate plans. Contact Thomas Walters today if you are ready to begin your estate planning process.